I have written earlier about Financial Independence – Is FI Really Worth It? and Why Do You Want To Achieve Financial Independence? Lately, I have been thinking about the “how” part of the FI journey. I have come across a lot of articles, books,
A lot of them talk about hard numbers and even give you the exact math behind how many years it would take to reach financial independence. I have personally found Four Pillar Freedom’s Early Retirement Grid to be extremely helpful. I highly recommend you to check it. Another resource that I found equally helpful is Dough Roller’s Financial Freedom Calculator. Go check them out and run your own numbers.
FI – The known parts
A widely accepted definition of Financial Independence seems to be – “If you can live off of your investments and not require a paycheck to sustain your monthly expenses, you have achieved FI.”
I think almost anyone can grasp this definition and have no trouble following the math behind that too. However, the tricky part is when you try to flesh out the “how” part of the journey. You often hit roadblocks and can get stuck with, “It’s specific to me” situations. When you try to device your own FI plan, you may notice that a lot of the advice you find on the internet may not work for you. So you’ve got to spend time
I have come across a lot of recommended techniques proposed by many in the FI community as the ideal way to achieve Financial Independence. A few popular techniques among them seem to be one or a combination of the following:
- Real Estate Investing (Owning Rental Real Estate or REITs)
- Investing in the Stock Market (Taxable Account, Roth IRA, 401K, etc)
- Starting your own business (A blog, podcast, book, selling stuff on Amazon or eBay or start a consulting business)
All of these approaches seem to be extremely popular and give you enough wiggle room to customize them to suit your own needs. I love the simplicity of these ideas and I personally have plans to pick one or more of the above-mentioned techniques myself.
As I think more about my own FI journey, I wanted to distill my thoughts about what it means for me to actually get there. What are the different levels I need to cross before I become FI? In this post, I wanted to dive deeper into each step and explain what it means to complete a certain step and explore some ways to complete each one of them.
Step#1 – Become Debt Free
I have written about our debt free journey earlier as a 2 part series – part I and part II. It was one of the best decisions we have ever made. I simply cannot emphasize the importance of debt freedom and how it changes your outlook towards your finances. There is something about paying off your debt that cannot be viewed purely as a math decision. I simply don’t believe that I would be able to work towards FI and carry debt. Being debt free makes me sleep peacefully at night and the stress I usually experienced when I carried debt like auto loans or mortgage on my rental property is gone!
The reason why I consider this as the 1st step in your FI journey is because it gives you that freedom to take risks. Most of the consumer debt you carry tends to get spent on buying things that go down in value. The most common consumer debt you find in America involves a credit card debt, auto loans or in some extreme cases, a payday loan. They are things that are either bringing down your net-worth or stopping you from building wealth. Auto loans, for example, can be really bad since their ROI go down in value, every passing year. Hence I wouldn’t recommend you to carry any form of consumer debt. Pay them off ASAP and never go back into debt.Once you're debt free, you don't have to plan your month around payments and due dates. Your cash flow increases and you can utilize that extra money to move closer to FI. Click To Tweet
Step#2 – Stop Living Paycheck To Paycheck
According to an article from CNBC, nearly 78% of US workers live paycheck to paycheck. This is truly disturbing since it translates to nearly 4 out of every 5 American being one paycheck away from a financial disaster. It just goes to show how vulnerable the vast majority of Americans are. It’s disheartening to know that so many people are living paycheck to paycheck and cannot afford to miss a paycheck It’s no wonder that when someone floats the concept of FI or FIRE, most of American think it’s a pipe dream and it’s simply beyond their reach. It’s like asking someone who hasn’t ever jogged in his entire life, to run a full marathon. It’s just simply out of question!
I consider this to be the 2nd step in your FI journey since it’s the achievement of a very important milestone. By breaking the cycle of living paycheck to paycheck, you’re now ahead of the rat race by 1 month. You’ve bought yourself a wiggle room of one month. If things go south and your paycheck doesn’t arrive for a month, you can still survive. This is a big deal. By accomplishing this seemingly simple task, you’ve surpassed near 78% of Americans. It puts you in the top 20% of the people in America!
I know that the FI community aspires to be more than just an average American, but I want you to pause for a moment and celebrate this milestone. It’s one of the many milestones you’ll accomplish in your FI journey. It gives you an early taste of Financial Independence. In a way, you get to experience a mini FI moment. I want you to soak this feeling in and internalize it. It will motivate you to conquer the more challenges and keep marching towards FI.Remember to celebrate small victories and don't underestimate the value of small wins. If you cannot appreciate small wins, you won't appreciate the big win. Don't be in a hurry to reach FI. Enjoy the journey and celebrate your wins. Click To Tweet
Step#3 – Build Your 3-6 Month Emergency Fund
According to another CNBC article, only 18% of Americans have an emergency fund that can cover their monthly expenses for 3-5 months. It says, about 55 million Americans still have no emergency savings. If you thought breaking the paycheck to paycheck lifestyle is a big deal, you’ll be amazed at how far ahead you’ll be if you managed to save up to 3-6 months of emergency fund.
If breaking the paycheck to paycheck life cycle feels so good, imagine what sustaining for 3-6 months without a paycheck might feel like. It must feel flipping awesome, isn’t it? I know you’d be draining your savings but look at it another way, you are now able to sustain 3-6 months without a paycheck. That’s a big deal. It puts you straight into the top 18% of Americans. Go build your emergency fund now!
I have written earlier how you can make the most out of your emergency fund. Having an emergency fund can be literally one of your first real steps towards materializing a FI plan. I personally believe that your financial plan needs to have enough safety nets to save you from getting hurt when things go wrong. I consider having an emergency fund as a basic safety net to your FI plan. I urge you to get your hands on every single dollar you possibly can and build that emergency fund on a war footing. It will save your life one day.
A word of caution about emergency funds – One of the urges I felt while building an emergency fund is to forgo this step or cut back on it and skip to investing directly. I request you to avoid any such temptations. This is your basic safety net and not having a good emergency fund can crash your FI plans and set you back several years, should you run into an unexpected financial situation, while pursuing FI. I am glad I chose to build my emergency fund and not cut back or skip this step. Whether you choose 3 months or 6 months, I would want you to definitely err on the side of caution and build that savings ASAP.An emergency fund is your insurance policy against Murphy's attempts to derail your FI plan. Having an emergency fund will further solidify the idea of why need to pursue FI and how an emergency fund will help you get there. Click To Tweet
Step#4 – Build Your F-You Money
When I first read about Why you need F-you money on J L Collin’s site, I was extremely thrilled. I couldn’t imagine someone even had a name for this sort of a fund. Reading his post and watching him do John Goodman (It’s not workplace-friendly so make sure you listen to it with your headphones on) is a real treat. If you haven’t already read the article or watched his video, go check out. You’ll really appreciate the power of F-You Money.
Have you ever been in a situation at work where your boss asked you to do something you hated and you still did it simply because your job was on the line? I bet you’ve been there not just once but several times. If you haven’t been there yet, don’t worry you’ll get there eventually. Well, you can argue that “You are paid to do that job. So you better not complain about it.” I get it. We all seem to have accepted that our jobs, no matter how much how much BS it entails, simply needs to be accepted for what it is and accept that as the reality of our lives. It seems to be applicable to about 80-90% of people in the whole world operate, let alone America.
I don’t blame people for this since there can be a myriad of reasons why someone is forced to put up with all the BS and abuse at work. Their finances can be really bad and riddled with debt, and they might be doing everything in their means to simply get by each and every month. I am not talking about them. If you are one of them, I want you to go to step#1 and work your way up from there. But if you are someone who has already managed to secure an emergency fund, I am talking to you. You have the potential and the wherewithal to start building an F-You Fund.
Having read about the F-You fund, I want to make it clear that an F-You fund for me is any sum (you define how much it is) of money that allows me to not just “survive” an emergency but “walk-away” from any job where it sucks the life out of you. I am talking of a fund that gives you the power to operate from a position of F-You and not from a position of submission. This is truly a giant leap in your journey to FI. It is one of those defining moments where you have now earned the power to walk away from an abusive boss or a job that sucks!An F-You fund gives you the freedom to "choose" a job of your liking since you can now afford to say F-You to any job or situation you don't like and simply walk away without any "consequences". Click To Tweet
If you look at it, it can be your first real experience of what reaching FI is all about. I would not look at this F-You Money as simply a bloated emergency fund since it is much more than that. It is your ticket to mini-retirements or breaks from your life-sucking job. Given the time it can sometimes take to find another job you really like or even change your career, I would look at F-You money as something that can help me sustain at least 12-18 months or more.
Also, I don’t want all of my F-You money to be sitting in a savings account. Since this is your second level of safety net, I would be a little aggressive with it and choose to go with an Index fund and invest my money. I would prefer to keep it in a taxable account and choose your portfolio of stock vs bonds to match your risk tolerance.
This money should be tapped into less frequently but still give you the power to say F-You, if need be. So it has to keep up with inflation and compound every single year. So invest it wisely.
It is one of the first steps, I recommend you to invest your money as against merely saving it. This is truly part of your FI money that you can put to effective use once your fully FI. Till then it’s got to grow and keep up with the stock market returns.
Step#5 – Make The Move: Day Job -> Dream Job
According to this article The World’s Broken Workplace, about 70% of Americans aren’t engaged with their job. Even though this number is 15% better than the rest of the world, it shows how dissatisfied the average American worker is. Can you imagine 70% of the workforce in an economy forced to do their job which they hate? You may have noticed by now why most of the Americans find themselves in this situation. Why do they wake up every single day and go to a job they hate so much? How this can be a good thing for their own well being? I simply cannot fathom the level of anger or frustration this can breed in the minds of the average American worker. It’s truly a state of helplessness that has been self-inflicted. You’ve got to question if you want to live your life like that for the rest of your life.
In the earlier step, I talked about the power of F-You money and how it gives you a sort of superpower that not many Americans have at their disposal. It’s the power to say F-You to anyone. It’s such a rare power, it almost feels like a
You know the other side effect of having F-You money? It gives you an opportunity to quit a job you hate and move to a job you love. I can bet my dollars on this, if every American is given a choice to walk away from a job they hate without any “consequences”, hands down they would. It’s really that bad. Having an F-You fund is a blessing. I want you to acknowledge this and use this “super power” to make that move.Trust me on this, when the biggest stress in your life, i.e. a job you hate or a boss you can't stand is gone, you get to free up that mental space to think more productively and positively. It's a feeling that can only be… Click To Tweet
A lot of people who quit a high-stress job often regain a lot in other aspects of their life like health, relationships, positive mindset, etc which simply cannot be quantified.
Even if this move from your Day job to your Dream job means a pay cut, take it. I want you to consider this equivalent to an archer pulling back the string on the bow before releasing the arrow. Sometimes you need to take a step back to move 10 steps forward. Moving away from the BS and toxic workplace lets you think about the kind of life you really want to build. It makes you think more clearly about your FI goals. This can be one of the best decisions you’ll ever make in your journey to FI and it will be totally worth it.
Quitting your day job and moving to your dream job is really an act of faith along with some level of calculated risk. In a lot of ways, this is a precursor to what you really want your life to look like when you achieve FI. It lets you trust your instincts and take risks. The very fact that you are pursuing FI, is an act of defiance and this move will solidify that decision even further.A dream job lets you focus back on your FI journey and motivates you to work harder towards your dreams. You don't wake up every day cursing and swearing. Your day is filled with less BS and more of the work that matters to you. Click To Tweet
Step#6 – Stop Trading Your Time For Money
Remember when you first began this FI journey, you were in debt and also living paycheck to paycheck. The whole concept of salary or paycheck is built on the idea that you’ll be compensated with money for the time you offer at work. This has been going on from time immemorial. People have always offered their services and have been compensated with money or it’s equivalent for their service.
We all know that there is a physical limit to how many hours you can work in a given day. So the money you earn in return for your time is also limited. Yes, you can upskill or add more value; but there is a limit to how much money you can make by trading your time. If you truly want to scale your wealth building pursuits and accelerate the accumulation of wealth, you’ve to go to make money even while you are not spending your time working.
One of several ways you can stop trading time for money is building assets that go up in value like real estate investments, stock market investments, intellectual property, etc. You really need to invent a cash cow. You need your money to work harder than you do and you need the army of dollar bills to work harder than ever before.
You’ve already been doing some of it as part of your F-You fund, this step is an extension to the same and focuses on building more and more assets that will eventually require you to trade your time lesser and lesser for money.
One of the key things to accomplish in this step is to reach a state of wealth that allows you to reach the 4% withdrawal rate that many in the FI community talk about. It’s that magical number where your chances of running out of money become next to none. In that regard, this can be one of the longest steps in your FI journey since you are now truly building the majority of your wealth, which you plan to live off of one day.
This is the step where you want to look at how to maximize your assets and also focus on building multiple streams of income. Focus on your business, if you have started one and start looking at different side hustles to make more money. Your pursuits should typically result in you eventually spending less time on the business itself so that you can continue to stop trading your time for money. I personally believe this to be one of the key factors to reach FI.The whole point of FI is to take back control of your time and have the freedom to spend it on things that matter to you. By definition, FI allows you to dictate how your day is spent since you don't rely on somebody else to pay for… Click To Tweet
Remember, time is a limited resource but money isn’t. So treat the limited resource with the utmost respect it deserves. You can always earn more money but you can’t have more time!
Step #7 – Touch Down Moment – You’re now FI
Congratulations! You’ve reached FI. A lot of people who reach FI don’t wake up one day and find out they are FI, and there are fireworks outside. It will be just another any other day in your life but you’d have reached your goal. I want to reiterate that it’s very important to enjoy this whole journey since what we are talking about could be anything from 5, 10 or even 20 years worth of work. So it’s a marathon you’ve just finished. It’s a touchdown moment of your life. What a great place to be!
For the majority of Americans working until 65 or even beyond that is simply an accepted reality they can’t change. If they haven’t been paying attention to their lifestyle or spending habits and in general their finances, they are never gonna dream of being financially independent.
As FI movement gains more and more mainstream, you’ll see a lot of people simply look at the FI community with utter disbelief. For them, it’s still a mystery how these people are able to walk away from their day jobs and follow their passion. It’s beyond their comprehension how these people in the FI community are able to pursue their dreams while they have to chug along. How did these people escape the rat race?
Personally, it’s a choice you have to make whether you want to spend the rest of your life living other people’s dreams or you’ll take control of your life and live the life of your dreams. By choosing the FI path, you stand a chance to fulfill your dreams and make some bold decisions along the way. You get to choose your own destiny.I want to make it clear that FI is not the end of your work life, for all it's worth it can be the beginning of your dream career. It's your chance to pursue a life you've always wanted to live but couldn't afford to. Click To Tweet
Like any other worthwhile pursuit, Financial Independence also comes with a lot of sacrifices. You need to be able to sustain any setbacks or failures you encounter along the way and stay the course. The reward that awaits you at the end of the journey will be truly worth the wait.
I would love to hear from you about your plans to read FI. What challenges or setbacks have you faced? How did you overcome them? Please share your thoughts in the comments.